Dollar dithers in thin trade as Trump passes pandemic aid package

By Administrator_India

Capital Sands

Even as India was put on the monitoring list with nine others, the US Treasury had largely praises reserved for the country for being transparent on its foreign exchange intervention.

The reason why India was put on the half yearly list report was that it met two of the three criteria — “having a material current account surplus and engaging in persistent, one-sided intervention over the reporting period.”

This is not the first time that India was put in the list. India was there in the list in April 2018, but was removed by May next year. Economists say India’s current account surplus will likely turn into a current account deficit, which will automatically drop India from the list again.

India for several years has maintained a significant bilateral goods trade surplus with the United States, totaling $22 billion in the four quarters through June 2020. India’s exports to the United States are “concentrated in sectors that reflect India’s global specialization”, such as diamonds, pharmaceuticals, and IT services, while U.S. exports to India reflect India’s domestic needs such as fuels, aircraft, higher education, and software, it said.

India’s net purchases of foreign exchange accelerated notably in the second half of 2019, and continued with the net purchases for much of the first half of 2020. This pushed net purchases of foreign exchange to $64 billion, or 2.4 per cent of the gross domestic product (GDP), over the four quarters through June 2020, the US Treasury observed in its half yearly report.

“Treasury continues to welcome India’s long-standing transparency in publishing foreign exchange purchases and sales.”

In fact, “India has been exemplary in publishing its foreign exchange market intervention, publishing monthly spot purchases and sales and net forward activity with a two-month lag,” the report said.

The US Treasury said the Indian authorities, however, should “limit foreign exchange intervention to periods of excessive volatility, while allowing the rupee to adjust based on economic fundamentals.”

“India can also leverage the recovery period to pursue structural reforms that will open its market further to foreign investment and trade, including foreign portfolio investment in Indian sovereign and sub-sovereign bonds, thereby fostering stronger long-term growth,” the report said.

The sharp contraction in the Indian economy in the first half of 2020 was due to the collapse in domestic demand brought on by the COVID-19 pandemic. The direct fiscal support of around 2 per cent of the GDP was “modest”, but there was “substantial monetary easing.”

India’s deep domestic demand contraction and slower recovery relative to its key trading partners contributed to the economy’s first four-quarter current account surplus since 2004, which was 0.4 per cent of GDP over the year to June 2020.

The reason why the country recorded a current account surplus was because as demand contracted during the Covid-19 lockdown, imports fell faster than exports. The surplus was also supported by low oil prices, relatively resilient remittance inflows, and steady services exports.